The Fed is Making a Mistake (EP.252)

Episode Summary

Executive Summary: The episode centered on inflation, rising bond yields, and the Fed’s tightening path, with the hosts arguing the central bank risks overcorrecting into recession. They debated the wealth effect, wage growth, housing affordability, and market front-running of policy. The show also covered Twitter/Elon Musk chaos, crypto wallet frustrations, retirement spending behavior, and lighter recommendations on movies and TV.

Main Topics: Fed policy, inflation, and the bond market (Priority: 5/5): The hosts discussed why yields lagged inflation for so long and then rose sharply, debating whether reduced Fed bond buying and signaling alone can move markets. They worry the Fed is tightening too aggressively and may intentionally force a recession. Wealth effect and recession tradeoffs (Priority: 5/5): They examined Bill Dudley’s argument that falling stocks and tighter financial conditions reduce spending, but argued recession would disproportionately hurt lower-income households while wealthy consumers may keep spending. Wages, labor shortages, and inflation at the bottom end (Priority: 4/5): Examples like Waffle House, a Michigan brewery, and Walmart truck driver pay were used to show rising wages and labor market strength. The hosts argued there may be a middle ground between high inflation and recession. Housing market stress and rising mortgage rates (Priority: 5/5): The discussion covered how fast mortgage rates have risen, how housing affordability has worsened, and how higher rates may reduce construction and increase inequality rather than cool prices evenly. Market forecasts, historical stats, and front-running (Priority: 4/5): They questioned whether historical recession and yield-curve statistics still matter in modern markets, arguing information is now too widely known and quickly priced in. Twitter, Elon Musk, and platform uncertainty (Priority: 3/5): The hosts joked about Elon Musk’s failed Twitter board plans, his trolling style, and possible product fixes like charging power users. They saw the platform as chaotic and strategically unclear. Retirement behavior, bond funds, and personal finance (Priority: 3/5): They debated whether individual bonds or bond funds are better, and discussed evidence that retirees often spend less than expected, suggesting many could spend more safely than they think.

Key Arguments: The Fed may be moving from too much stimulus to too much restraint, and the risk now is causing an avoidable recession. Financial conditions matter in the U.S. because equity prices affect household wealth and spending behavior. Higher inflation has helped some low-end workers through wage gains, but it also squeezes the middle class and small businesses. There may be a policy middle ground: tolerate somewhat higher inflation rather than intentionally engineer recession. Historical market/recession patterns may be less reliable because markets now front-run widely known signals much faster. Housing is so distorted that both higher and lower mortgage rates can be negative for the market in different ways. Many retirees spend far less than expected, meaning the common fear of outliving assets may be overstated for some households. Individual bonds provide psychological comfort, but bond funds can accomplish similar maturity/reinvestment effects with less hassle.

Data Points: 10-year Treasury yield: about 2.8% - Used to illustrate the sharp rise in rates across the curve Inflation vs. 30-year Treasury: Inflation moved above the 30-year Treasury in April of last year - Referenced as a sign rates were slow to respond Waffle House maintenance technician pay: $18 to $25 per hour - Example of rising wages in low-end labor markets Hop Lot Brewing summer compensation: up to $30 per hour - Example of labor market competition in Northern Michigan Walmart truck driver starting salary: $95,000 to $110,000 per year - Highlighting wage increases in logistics jobs Typical Walmart truck driver starting salary before increase: $87,000 per year - Compared against the new pay range Share of population owning stocks: 50% - Used in the discussion of how recessions and wealth effects hit different groups SP 500 earnings acceleration expectation: nearly 20% of stocks expected to accelerate earnings every quarter in 2022 - Cited from a Bank of America chart via Sam Rowe Twitter revenue growth: 21% last quarter; 37% the quarter before - Used to argue the platform is growing revenue despite product uncertainty Free YCharts access giveaway: 50 more investors through April 30 - Promotional mention at the start of the episode YCharts subscription discount: 20% off initial subscription - Mentioned for listeners using the show code Animal Spirits NFT Discord ETH given away: 23.4 ETH - Update on the community giveaway total Animal Spirits NFT Discord owners: more than 250 owners - Community growth update Retirees with $500,000+ at retirement: median spent down just 11.8% after 20 years - From an Employee Benefit Research Institute study cited in discussion of retirement spending Retirees with $200,000 saved: spent about one-quarter of assets after 18 years - Same retirement-spending study Retirees who increased assets after retirement: one-third - Showed that many retirees do not draw down assets as expected Mortgage rate year-over-year change: highest since 1979 - Used to emphasize how quickly borrowing costs have risen Home affordability vs. rent: biggest spread since 2007 - Rick Palacios chart comparing owning to renting nationally Homebuilder stock performance since start of 2020: underperforming the S&P 500 by a decent clip - Listed for KB Homes, Lennar, D.R. Horton, and Pulte Private builder contract cancellation rate at 5% rates: less than 3% - Bill McBride anecdote suggesting current buyers are still qualified

Pivotal Quotes: "I think we’re bordering on a Fed mistake here. I think they went from too much gas pedal to too much brake." — Michael: Opening debate on whether the Fed is over-tightening "One way or another, to get inflation under control, the Fed will need to push bond yields higher and stock prices lower." — Ben quoting Bill Dudley: Discussing the need for tighter financial conditions "I’m anti-recession." — Michael: Stating preference for tolerating some inflation over intentionally causing a downturn

Implications: Listeners should expect more volatility as the Fed tightens, with housing, bonds, and equities all under pressure. The episode suggests policy may overshoot, hurting lower- and middle-income households most, while markets and businesses adapt unevenly.